Senate Derails GOP Effort to Cut Capital Gains Taxes : Congress: Lawmakers revive economic growth bill’s $2,500 credit for home buyers but deny IRA deductions for top 4% of wage-earners.

WASHINGTON — In a referendum on a key part of President Bush’s economic package, the Democratic-controlled Senate Wednesday crushed a Republican-led effort to cut capital gains taxes.

The 57-37 vote, together with the lack of any across-the-board capital gains provision in a comparable House-approved bill, indicated that there will be no such reduction in the legislation expected to be sent to the President next month.

The Senate did, however, reverse itself and revive the President’s proposal for a $2,500-tax credit for qualified home buyers this year. But it then offset the cost by denying tax-deductible individual retirement accounts to the top 4% of wage-earners: those individuals making more than $80,000 and couples earning above $120,000 annually.

The unexpected turnabout came the day after the Senate signaled that it would approve deductible IRAs for all wage-earners, regardless of income, and dropped the home buyers’ credit so it could expand tax incentives for investors in newly created enterprise zones.

Senate debate on other provisions of the $32.5-billion tax bill was suspended later Wednesday as Congress left town on a monthlong recess. But Democratic and Republican leaders said the measure would be approved when Congress returns from its summer vacation in early September.

The House already has passed its own, less-costly version of the tax legislation, and a compromise bill will be drafted in a Senate-House conference once the Senate has finished its work.

Under the revised Senate bill, single workers covered by a company pension plan who earn up to $80,000 a year and married couples who make up to $120,000 would be able to make a deductible $2,000 contribution to an IRA once a year.

Existing law allows a full deduction to wage-earners not covered by pensions, regardless of income, and to covered employees with incomes under $25,000 for an individual and $40,000 for a couple.

The bill, however, would create a new “Super-IRA” to which workers could make non-deductible contributions. Interest would be tax-free as long as the money remained in the accounts for five years or more.

The popular home buyers’ credit was restored to allow a $2,500 tax credit for those who have not owned a home in the last three years and who buy a home between July 27 and Jan. 1, 1993. Earlier, it had been dropped from the legislation by the Senate Finance Committee.

The Senate debate over capital gains taxes on profits from the sales of stocks, real estate and other assets reflected the presidential campaign positions of Bush and his Democratic rival, Arkansas Gov. Bill Clinton.

The President has made a cut in such taxes a keystone of his economic package. But he has been unable to persuade Congress to endorse the proposal, despite four years of trying.

Sen. Connie Mack (R-Fla.), sponsor of the capital gains plan, echoed Bush’s argument that its adoption would spark the nation’s economic recovery and create jobs.

Opponents, however, contended that the cuts advocated by Mack would add $47 billion to the federal budget deficit over the next five years and unduly enrich the wealthiest 2% of Americans.

“This amendment will actually raise revenue for the federal government,” Mack insisted. “Everyone gains: the elderly, middle-income, low-income . . . the states, the economy.”

Mack’s proposal would reduce tax rates on capital gains from 28% to 15% for upper-income taxpayers and from 15% to 7.5% for most other people.

Individuals paid the 28% rate in 1991 on adjusted gross income above $20,350; married couples on adjusted incomes above $34,000.

But Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee, said there was no revenue-raising to offset the proposed reductions.

“We’re being asked to float a bunch of hot checks to run the government’s business,” Bentsen argued. “We simply cannot afford a $47-billion increase in the deficit.”

Bentsen said he was puzzled that senators who were the strongest advocates of a balanced-budget amendment to the Constitution were now supporting the deficit-raising cut in capital gains taxes.

Mack, however, said estimates of future revenue losses from this tax reduction were based on false premises.

His amendment was killed when the Senate refused on the 57-37 roll call to waive a point of order made by Bentsen that Mack’s proposal violated the pay-as-you-go provisions of the Budget Enforcement Act.

A move by Sen. Bill Bradley (D-N.J.) to allocate $2.7 billion for neighborhood jobs, anti-crime measures and reconstruction failed on an 80-14 vote. Bradley had proposed reducing three business tax breaks to offset the cost of his plan.

Resuming work on the tax bill is only one task facing Congress when it returns in September for a session that will certainly be dominated by election-year politics.

Democratic leaders in both the Senate and the House plan to send Bush a number of bills that he is expected to veto, dramatizing the issues that divide the two parties in the midst of the election campaign.

The President also may reject several large appropriation bills because of abortion-rights provisions that he objects to.